Introduction to Financial Accounting Theory.pptx

1、Financial Accounting Theory,1,Course Outline,Textbook Grading Scheme Class participation: 10% Homework assignment: 15% Group project: 15% Final Exam: 60%,2,Chapter 1,Introduction to Financial Accounting Theory,3,1.1 Objective of the Course,To create an awareness and understanding of the financial re

2、porting environment in a market economy Nobody can live outside this environment As students, accounting professionals, firm executives, employees, regulators, suppliers, customers, competitors,4,1.1 Objective of the Course (Contd),Critical thinking skills See through meaning behind numbers/facts Co

3、nnect dots to a line Why? So what?,5,1.2-1.3 Historical Perspective of Accounting,6,Accounting Milestones,Joint stock company first appeared in England,Stock market crash,Market meltdown,Luca Paciolo: double-entry system,Large-scale accounting scandals,7,1494 -,Paciolo (1494): The first complete des

4、cription of the double-entry bookkeeping system Paciolo did not invent the system; it had developed over a long period of time. Accounting is mainly used by business person to control day-to-day business operation,8,1700 -,Joint stock company Accounting system gradually shifted to inform investors o

5、f firms operation 1844 Companies Act A law that first requires audited financial statements The law was dropped a few years later, and was re-instated in early 1900s Accounting largely unregulated Financial reporting largely voluntary E.g. amortization of capital asset Accounting center gradually tr

6、ansferred to U.S,9,1929 -,1929 stock market crash 09/23/1929, peak of Dow Jones was 381 10/28/1929, 12.8% drop in one day closing at 261 10/29/1929, another 11.7% drop closing at 230 07/08/1932, closing at 41 (an 89% decline from 381),10,1929 -,Major contributing factors of 1929 crash Numerous insta

7、nces of manipulating financial reporting and other abuses Accounting reports are based on widely varying accounting practices Planted the seeds for regulation Speedy passage of Securities Act in 1933 Creation of SEC in 1934,11,1934 creation of SEC,A move-away from business self-regulation Eventual m

8、essage was that unless the profession established an authoritative body for the development of accounting standards, The SEC would do so and SEC would mandate the required reports How does accounting profession survive in a regulated environment? If SEC takes over, the prestige and influence of the

9、profession would be greatly eroded Must persuade SEC that the profession can do satisfactory job to protect investors,12,U.S: From CAP, APB to FASB,CAP (1936-1959) Committee on Acct Procedures Era of “putting out fires” Used primarily piecemeal (inductive) approach to develop accounting rules No und

10、erlying accounting theory APB (1959-1973) Accounting Principles Board Era of “theory seeking” Substantial efforts to find basic concepts, but with relatively little success FASB (1973-current) Financial Acct. Standards Board 1973-2001: Era of “thriving” 2001-Present: ?,13,FASB (1973-2001)-Era of “th

11、riving”,Achievements Conceptual Framework: SFAC 1-7 Firmly established FASB as an standard setting authority within U.S. and globally,14,FASB (2001-),Institutional challenges SEC has the legal authority to set standards whenever it chooses IASB, an increasingly strong competitor Created as IASC in 1

12、973; restructured into IASB in 2001 US GAAP competes with IFRS Sarbanes-Oxley Act (2002) As a result of a series of high profile corporate accounting scandals Enron, Worldcom, etc.,15,Sarbanes-Oxley Act,Established Public Company Accounting Oversight Board (PCAOB) Regulatory body of public accountin

13、g firms Overseen by SEC Asked SEC to investigate principle-based accounting SEC now has influence over both funding and staffing in FASBs operations FASB lost independence Auditor reports to BOD rather than management,16,2007-2008 Market Meltdown,Accounting issues leading up to crisis Fair value acc

14、ounting for financial instruments Complicated by liquidity pricing Transparency Insufficient disclosure of risk, complex financial instruments, and hidden debt Creative accounting Off-balance sheet financing liabilities Use loopholes in existing GAAP to avoid consolidation of certain subsidiaries,17

15、,Discussion: What observations can be made from the snapshot of accounting history?,The business world can survive without accounting (at least before 1211) The business world can survive without formal accounting theory (at least before 1960s) So, whats the role of accounting? Whats the role of acc

16、ounting theory?,1.8 evidence from logic reasoning Inductive (Positive) “What actually is” From sample to population; evidence from empirical findings Is dominant research paradigm to-date (+) Grounded in real-world phenomena; can realistically focus on only a small part of relevant environment (-) T

17、end to examine rather narrowly defined questions or problems; piecemeal approach,23,Challenges Facing Accounting Theory,Issues unresolved are more than issues resolved. Why? The complexity of information (1.7) The complexity of information need (1.9) The complexity of reporting environment (1.10) Th

18、e absence of perfect or true accounting concepts Still scattered pieces (lack full picture) Piecemeal approach,24,1.7 The Complexity of Information,Individual reactions to same information may differ Reporting to investors vs. reporting on stewardship Information also affects how well markets work C

19、h4 the “bad” products or services are more likely to be selected in such scenario Moral hazard If a partys action is not observable, this party tend to shirk his duties, to the disadvantage of other parties,26,Information Asymmetry (continued),Role of accounting information To control adverse select

20、ion Convert inside information into outside Supply useful information to investors To control moral hazard Make manager efforts observable Both roles crucial if markets are to work well,27,1.10 The Fundamental Problem of Financial Accounting Theory,The best measure of net income to control adverse s

21、election is not the same as that to deal with moral hazard Investors want information about future firm performance Current value accounting? (Ch6&7) Good corporate governance requires that managers “work hard” Do historical cost accounting or conservatism accounting better reflect manager effort? (

22、Ch8&11),28,1.4 Conservative Accounting,Write down but do not write up A partial application of current value accounting Lower of cost or market Ceiling tests Current (Fair) value accounting Current value accounting writes up and down Increased conservatism in recent years A response to the volatile

23、nature of current values?,29,1.11 Regulation as a Reaction to the Fundamental Problem,Standard setting is a form of regulation Standard setting mediates conflicting interests of investors and managers Investors want lots of useful information Managers may oppose to release all the information that investors desire Due process in standard setting Representation of diverse constitue